Example: Financial Health
SCCO International Research // Volume 45
Authors: Gerhard Nenning, Konstantin Wrona, Kai Daniels
"Turbulence is nothing more than a change that planning could not handle,” Henry Mintzberg once wrote. Although this proposition has always been valid, the current crisis exposes the depth in shortcomings of the typical internal planning systems when confronted with market uncertainties. Most companies lack the systems necessary for the identification of future market swings within their own industries and markets. The common “single scenario” planning approach is particularly inadequate in an economic environment characterized by a high degree of volatility.
Although no company will be able to develop strategies or systems that take into account all potential uncertainties, surprisingly many companies do not consider any alternative scenarios: scenarios that would encompass a range of plausible developments and effects and that would more fully prepare a company for sudden performance slumps and changes in the market environment.
The recent crisis reveals an urgent need for a continuous scenario-based planning approach that reflects the volatility inherent in the current market environment. Two dimensions must be considered in such an approach:
- Financial health of the company
An assessment of the company’s financial health does not aim to forecast potential external developments but rather to detect the critical performance thresholds necessary for maintaining a targeted level of internal financial strength. For this dimension, the financial analysis must focus on the crucial KPIs of profitability and liquidity.
- Market indication for each sales market
An early warning system, which is based on key industry-specific and macroeconomic indicators, identifies trend reversals within business markets in a timely fashion.
Only a “scenario matrix” of this kind enables management to adequately prepare for uncertainties and to determine the best response. Within this framework, management will be able to better organize crisis responses, set priorities within the capital allocation process, and make strategic decisions in a more informed and effective manner.
